Wealth Insights - April 2016

Wealth Insights

April 2016

Investing? Focus on What You Can Control

Worrying over the wrong things leaves too much to chance

When investing, there's no shortage of elements which are out of your control, whether it's the state of the economy, the direction of financial markets, interest rates or inflation.

The trouble starts when you spend too much time trying to anticipate how the world will unfold, instead of taking charge of your investments. Creating a sound plan centred on what you can control, so you're not left just hoping for the best, gives you a leg up on achieving your goals.

The problem with trying to control what you can't

Research consistently shows that investors earn far less than they should based on the long-term performance of the assets they own. Over the 20-year period from 1996 to 2015, average returns from stocks, bonds, real estate and commodities outpaced the typical US investor's results by as much as 6% annually.

Why do investors consistently fall short? Too often it's because they allow matters outside their control to rule their behaviour.

Pinning your hopes on identifying the next hot stock, which sector of the economy will outperform, or what central banks will do next is a shaky path that leaves too much of your future to chance.

Taking command of your investments

If there's so much that's out of your hands when investing, what can you do to stack the odds in your favour? Here are four key areas to pay attention to.


Unless you choose a guaranteed-rate investment, you can't control your rate of return. But in the world of investing, risk and return normally go together. Accepting more risk in your portfolio creates the potential for higher returns over time. And, while you can't control risk directly, the good news is you can manage it through asset allocation.

Diversifying your investments has its advantages. Spreading your portfolio's risk among different asset classes, like stocks, bonds and cash, increases the probability at least some of your holdings will be rising in value to offset any that are falling. This helps stabilize your portfolio's overall returns.

What's more, because it's difficult to predict which investment or asset class will be the next big winner, by casting a wider net there's less chance you'll miss out on opportunity.

How much risk you should assume will be influenced by three key factors within your control: your investment goals, your time horizon and your capacity for volatility.

Having an aggressive savings goal, but a short time-frame, demands taking on more investment risk than if you won't need the funds for decades. That said, if the higher volatility that comes with having overweight growth investments keeps you awake at night, it may be wiser to explore another option like saving a little extra each month so you're able to invest more conservatively.


Even if you can't control what financial markets do, you can control how you react to what's happening around you. That means taking a disciplined approach to investing, including setting up a game plan to guide you through all market conditions.

Tune out the noise. Consuming a steady diet of business news won't necessarily make you a better investor. Rather, it's apt to confuse and mislead. What the financial markets do today or next week probably won't have much to do with you reaching your investment goals years from now. Do your portfolio and your nerves a favour – ignore the headlines.

Be patient. Over short periods investments can behave in ways you don't expect. However, there's strong evidence returns become more predictable in time. For example, between 1980 and 2015 the Canadian equity market experienced an annual loss on average of once every four years, with yearly returns ranging from -39% to 87%. But, the market never lost money over any 10, 20 or 30-year period during that stretch.1

The lesson is don't let the market's short-term swings tempt you into fiddling with your investment plan too often. Be patient and give your strategy time to work. Make major adjustments only when changes to your objectives, risk tolerance or other fundamental factors warrant it.

Review and rebalance. While it can be detrimental to get overly active with your portfolio, 'buy and hold' shouldn't mean 'buy and forget'. Review your progress at regular intervals, and at least annually, to see how well your investment performance is measuring up against your goals and relevant benchmarks.

Building regular reviews into the investment process gives you the opportunity to maintain your portfolio's ideal asset allocation through rebalancing. An easy way to rebalance is to add to those assets that haven't performed well lately, using cash from selling investments which have. Or, direct new cash coming into the portfolio where it's needed to restore your target asset mix. When you rebalance you help keep your portfolio's risk level in check using a 'buy low, sell high' mentality.

Pay yourself first. It's a simple idea that can make a significant difference. Automate your savings by committing the same amount toward your long term goals each month or with every paycheque. Having a structured savings plan that goes on like clockwork lets you invest sensibly through the market's ups and downs.


While fees and investing often go hand-in-hand, it doesn't mean you're without options.

A basic consideration when selecting mutual funds is the ongoing management and operating expenses associated with owning a fund, expressed through the management expense ratio, or MER. Part of the management fee may also go to your advisor in exchange for the advice and services they provide. You don't pay these expenses directly; they're factored out of your fund's investment return.

Put plainly, the lower the MER, the more investment return you keep. Say you invest $100,000 earning 6% annually before expenses. Assuming a 2% MER, you'll have just over $148,000 after 10 years. On the other hand, with an MER of just 1%, your savings will grow to nearly $163,000. The extra dollars flow straight to your personal bottom line.

In practice, it's wise to not zero-in on fees alone when judging investments.

While expenses matter, there are other things to consider. Simply going with the fund with the lowest MER isn't always the best choice. What's more important is understanding your needs based on your risk profile, investment style and your overall goals. Take the time to map out your short, mid and long term goals with your financial planner so that you get the most value for your investment dollar.


When you think about taxes and your investments, remember the old adage: it's not what you make, it's what you keep. How much you'll keep hinges on the kinds of assets you choose and how they're organized, particularly important if you're a high income earner. Revisions to marginal income tax rates announced by the new federal government mean as a BC resident in 2016, you could lose as much as 48 cents of a dollar of investment income to tax.

Not only is your tax strategy something you control, building a tax-smart portfolio can significantly boost the savings you'll accumulate over the years.

Picking the right mix of accounts, including RRSPs, TFSAs and non-registered accounts, will depend on a range of factors. Will your income be higher down the road? Do you hold foreign investments? Is there an opportunity to split income with your spouse? Sometimes the best decision will be to pay off debt and scale back investing until that happens.

Remember that while taxation is important, it shouldn't drive your investment planning. Give priority to developing an asset mix and risk profile that suits your circumstances and goals. For example, as a conservative investor, don't ramp up risk in your portfolio by swapping bonds and GICs for equities, just to avoid paying higher tax on interest versus dividends.

Get the right advice

Dealing with the uncertainty of financial markets can be difficult when you try to invest alone. That's why it pays to team up with a partner who has the knowledge and expertise to put you in charge. Financial planners work with you and help you make important planning decisions that extend well beyond where and how you invest. They do more than just manage your investment portfolio; they invest the time, knowledge and emotional discipline to ensure you have a strong financial plan for the future.

At Westminster Savings, we'll help you create an investment strategy that evolves as your life does, and keeps the focus on your goals – not on the things you can't control.

Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.

*Mutual funds are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated.

1"Volatility Decreases Over Time", RBC Global Asset Management (March 23, 2016)